Cash flow management in a crisis is absolutely vital. It can mean the difference between your business surviving or closing your doors. You need to understand the impact of reduced sales on your cash, what your cash flow will look like in the next 3, 6, 12-months, and how you can impact your cash quickly.
In our recent webinar, Palo Alto Software CEO, Sabrina Parsons walked through how to effectively forecast cash flow using proven methods that she, and the team at Palo Alto Software, are currently using to combat the economic effects caused by COVID-19. These incremental steps can help you take control of your cash flow in the short-term and define strategic methods to keep your business healthy throughout and after this crisis.
You can view the full recording and webinar transcript below, as well as access COVID-19 and forecasting resources mentioned throughout Sabrina’s talk.
Check out this webinar if you’d like to know:
- How the Paycheck Protection Program and Economic Industry Disaster Loans may impact your business.
- How to create a 3, 6 and 12-month cash flow forecast.
- What sales and expenses in your business most affect your cash in the bank, and what you can do to stay cash healthy.
- How to forecast your cash to know the loan amount you need to get through the next 6-12 months.
- How to apply your loan and potential loan forgiveness to your forecast.
How to Forecast Cash Flow in a Crisis – Full Recording
This webinar originally aired on April 3, 2020.
To bypass the intro to the webinar and get right into the planning information, skip ahead to 3:38 in the recording.
Resources mentioned in this webinar:
Business Resources for SBA Disaster Loans and the COVID-19 Impact: Our regularly updated COVID-19 Resources page that includes articles, additional webinars, and other relevant information.
Tips for managing your cash flow: Get some quick tips for managing your cash flow when there are substantial changes to your business. These are tips you can use today.
How to apply for an SBA Disaster Loan: Learn how to apply for a disaster loan if your business has been impacted by the COVID-19 crisis.
How to apply for a Payroll Protection Loan: If you qualify, these loans are eligible for forgiveness. That means that this could be free money for your business.
Get Started Making Your Business Plan for Your Loan: See how LivePlan can help you effectively plan, forecast and produce the necessary documents for your EIDL or PPP loan.
LivePlan: Interested in learning more about the planning tool Sabrina used throughout the webinar?
Cash Flow Statement Example: Check out our free cash flow statement download to get started on your cash flow forecast today.
How to Forecast Cash in a Crisis Webinar transcript
[00:00:30] My name is Sabrina Parsons. I’m the CEO of Palo Alto Software. We produce the content Web site B plans.com and a whole bunch of different tools to help you run your business better, including LivePlan. And so this webinar is brought to you by live plan learning.
Payroll Protection Program and Economic Injury Disaster Loans
[00:03:38] So now let’s jump right in. I really felt remiss to not talk a little bit for our U.S. customers about the Payroll Protection Program or the PPP. The PPP is available starting today for people to apply. It is available for small businesses and this is who’s eligible. So if you are a business that looks like this, you may be eligible for the Payroll Protection Program. The Payroll Protection Program is part of the CARES Act that was passed a week ago. That will bring some small business aid to small businesses as long as they are eligible. As per this list and as long as they spend the money in certain ways. I think that right now if you think your business is eligible and could use the Payroll Protection Program, I very much urge you to talk to your bank. If your bank is an SBA approved lender, your bank can help you with this. If your bank is not an SBA approved lender, ask them who they suggest you work with. So why and how are you eligible for this program and what is it? The Payroll Protection Program is going to allow small businesses that are eligible to take out a loan. You do not have to have a good credit history. You do not have to go through any sort of loan requirements. All you have to do is be eligible as per this slide. And you have to have a business that has uncertainty because of the current economic conditions that makes the loan request necessary. And you have to agree that you’re going to use the loan proceeds to retain workers and maintain payroll, make mortgage lease or utility payments, and you cannot have other applications pending for similar programs for similar purposes.
[00:05:56] How much can you get from the Payroll Protection Program? Well, there is a way to figure it out. You take your last twelve months of payroll, if you’re brand new, you can just take January and February of payroll. But if you’re not brand new, you take your last 12 months of payroll and you divide that by twelve to get your average monthly payroll. And then you’re allowed to multiply that by two and a half, i.e. two and a half months of average payroll is the total amount you’re eligible to get. What is forgivable is eight weeks of your current payroll, mortgage, lease or utility.
[00:06:40] So two numbers to figure out. I urge you to work with an accountant. We have a link to the Payroll Protection Program article that gives you all of the information. And I think Kody or John are going to put that in the chat in go to webinar so you can look at it and you can really get into the details. You’ll actually see we researched it. Kody really helped us understand the program, and all of the details are there. So it’s important that you kind of go through that, take your time and understand if you’re eligible.
[00:07:19] And what does that mean for your business? Now, to really understand what it means for your business, you have to have a full financial forecast and you have to have a cash flow forecast, because what you’re really getting out of the Payroll Protection Program is cash and it’s cash for your business. And so you should know how much cash you need given the current situation. I see a little bit a few questions here as some people who maybe signed on late were recording this. So all of this will be available afterward. And we’re going to be including resources and details for you to get a lot more information about both the PPP program as well as the EIDL.
[00:08:05] So the Payroll Protection Program is all about payroll. You can’t lay people off and you’re going to get eight weeks of forgiveness. If you do the PPP correctly, it essentially could be a grant for your business, but you’ve got to do it correctly and the details are going to be in that article.
[00:08:59] OK. So now you’ve got to determine whether the PPP is right for you. It may or may not be. You can look at the details on that article. If you need more money or you want to pay for things that are not payroll and rent or mortgage and utilities, you need to pay for inventory. You need to pay for other things to keep the lights on at your business. You may want to consider the Emergency Injury Disaster Loan. EIDL a 30-year loan at 3.75%. Unlike the PPP where you’re going to get access through your SBA approved bank, you’ve got to go to the bank for that one. The EIDL comes directly from the U.S. Treasury. And you have to go to the SBA.gov website and literally just type SBA.com and you’ll go to that website.
[00:10:29] So two different places to apply for those loans. The EIDL directly from the SBA.gov directly from the Treasury. The EIDL has qualifications, unlike the PPP, for EIDL, you do have to have a good personal credit history. So 650 and above. The EIDL also requires a personal guarantee i.e. your personal assets as the business owner are on the line. It may be what your business needs. A 30-year loan at 3.75% is actually a pretty good business loan in most times. I know we’re in a very strange time right now. But it is not forgiven. And if you think your business is going to go bankrupt, you probably want to think very carefully before getting yourself into this because you will still have to pay off this loan.
[00:11:24] Now, how do you know whether one of these things are going to work for you? Well, the only way you’re going to know is if you can do projections of sales and you can understand projections of your business expenses. You can then see the amount of your estimated loss and you can see the impact on your cash if you end up after you do all of this being negative in cash, $20,000, well, that means you need at least $20,000 or you will be bouncing checks. If you’re negative, $300,000, same thing. So in order to actually understand how much money you need and which one of these loans are applicable, you’re going to have to do that cash flow forecast and to get a cash flow forecast, you actually have to do your full financial forecast and see what’s happening to my sales. What are the expenses that I can reduce? And again, knowing that caveat that if you want the PPP loan, you can’t reduce that, and that might be a nonstarter. You may need to reduce staff to get your business going.
[00:12:36] Now, if you are abroad, if you’re international, you’re still going to go through the exercise of a cash flow forecast because you still need to know how much money your business needs to survive. But then you’re going to have to use the resources in your country that are being given by your government for small business aid. And there are resources all over the world. I’ve been reading and seeing all kinds of things that governments are doing to help you. We haven’t researched all over the world, but we know what’s happening in the United States. And I can give details on that. I can’t give you details of what’s happening in Europe, in Asia, in South Africa and Australia. But you can go to your governments and you can figure this out, and the best place maybe to go is to your accountant in whatever country you’re in. They probably understand what’s going on.
[00:13:28] So before we jump in and we get into really how do you develop this cash flow forecast, I want to talk about a really important concept. This is something that I teach small businesses all the time and it’s really hard to understand and I totally get it. Finance and business finance. Profit and loss statements. Balance sheets. They can be complicated. You probably didn’t get into business because you’re an accountant. You probably didn’t get into business because you necessarily have a business degree or an MBA. You have a passion for what you do. You’re part of a family business. This is your dream, but you don’t necessarily have the finance and accounting background. That’s why we’re here. We want to help you. We want to make this easy, but we want you to do it the right way.
Profits Vs Cash
[00:14:19] So profits are not cash. At the end of the month, let’s say March of 2020, you have your bookkeeper or you’re doing your own books. You’re using some software, maybe Zero, maybe QuickBooks, and you finish all your books and you basically close your month of March. You can then go to your reports and see your profit and loss statement. The very bottom will be your profit, or maybe you didn’t make a profit in March, maybe you already started losing money, right? Depending on where you are in the world or in the US, things started getting bad at the end of February or very, very quickly in the middle of March.
[00:14:59] So you might not have made a profit. That number on your P&L at the bottom is not your cash. It is simply the number that comes from all of your revenue, minus your direct cost and your expenses. That doesn’t mean cash. Now, if you’re a 100% cash business, meaning everything you transact is in cash, you pay all your vendors in cash and you get all of your money in cash, then maybe that profit number and the cash number are the same. But if you do anything where you’re paying vendors 30 days after they invoice you, if you send any invoices out to any customers, then that profit number does not equal the cash number in the bank. And it’s really important for you to understand that you can be unprofitable for a few months. But If you have a cash cushion you’ll be okay, but you can not be okay if you’re bouncing checks and you don’t have money in the bank. I just want to make sure that everybody understands that.
Using LivePlan for forecasting
[00:16:08] So one of the things we’re going to do is we’re just going to jump into our tool LivePlan. Now, I want to make it clear you do not have to use a tool like LivePlan to do your cash flow, forecasting your full financial forecasting. Kody or John will put into the chat, we’ve got a download of an example cash flow statement that you can look at and that may be useful. There are available online, some free excel templates. Your accountant may be able to help you.
[00:16:39] At the end of the day, though, what you have to understand about cash flow forecasting is that it is complicated. It is not simply putting a list in Excel of all of the revenue and income you get and subtracting all of the things you spend, because that number at the bottom is profits. It does not take into account that you might be waiting thirty or forty-five days to get paid from your customers, that you may be waiting 30 days or forty-five days to pay your vendors. Those calculations have to be included. It may not be taking into account on that simple Excel spreadsheet your inventory and how much inventory you have to buy to sustain your business. And this is why cash flow forecasting is complicated in terms of all the equations and algorithms that live behind it. It’s not complicated if you work with someone who knows what they’re doing. You use a good tool, and like I said, it can be a spreadsheet, and you understand all the drivers that create cash.
[00:17:44] So we’re going to jump into LivePlan, we clearly think it’s a great tool, and what we’re going to do here is I’m going to show you all the concepts. You can take these concepts and apply them everywhere. We’re also going to give you a super great deal on LivePlan at the end of the webinar. So you’ll be able to buy a lot of planning for the next two months for ten dollars if you want to. But what I really want to do right now is focus on the concepts of how you’re going to understand what’s going on with your business today and how does that then get impacted by coronavirus. What does that do to your sales? What does that do to your expenses? And what does that do at the end of the day to your cash and how do you forecast your cash flow?
[00:18:32] So we’re going to jump in here. I’ve logged into LivePlan. I’m in my business. You see that right there? I’m in my forecast. Now, when you log into the LivePlan tool, we have a lot of tools within the broader LivePlan that can help you. You can create a one-page pitch or a one-page business plan. You can create a full business plan. It’s in lender approved format. So if your lender needs a business plan, this will work for you.
Adjusting your actuals
[00:19:01] We’re going to focus on the forecast tab. I’m also going to tell you that in the benchmarks, we have industry benchmarks for your business in North America. So we don’t have them worldwide, but we do there. And then the dashboard is a great tool to manage your business on an ongoing basis. And it allows you to connect to QuickBooks or Zero or manually enter numbers. And you can actually manage what’s actually happening in your business to your forecast. But for the purpose of this webinar, we’re going to stick to the forecast, because I want to show you all those principles of cash flow forecasting. That’s the most important thing that you need to learn right now for your business, and this is what’s going to help you understand what this crisis has done to your business.
[00:19:50] So we’re in the forecast. We’re in the financial tables. And the first thing we need to do is start with revenue. Where do you get your revenue? So I’m going to add a revenue stream. And before I do that, I actually want to go back here and show you some options here. When you sign up, you’ll have the ability to have a company name, start a forecast, link the forecast to be able to choose a lot of stuff. So my business and I’m starting the forecast in January of 2020. I’m doing that on purpose because I want to see what’s going on with my sales and what has happened. And so that I can prove, you know, where I’m going to be. Now, if your business has been in existence for over a year, you might want to start in January of 2019. And what you’ll do is actually put in all of your actual results in the forecast so you can see where you are. But for the purposes of this, we’re starting January 2020.
Adding and adjusting revenue streams
[00:20:52] We’re going to go back to the forecast here. So I’m here. I’m going to add a revenue stream and I’m going to call it sales one. And then I’m going to decide what kind of revenue stream it is. You can see that we allow you to choose whether you’re selling units, products, whether you’re selling hours, whether you have recurring charges, your membership. Right. Or a subscription, lots of subscription services today or you’re just going to put in flat out dollars. And that may be the easiest thing for you.
[00:21:27] Right now, I’m going to show you how the unit sales work. As soon as I clicked that, I get unit sales in unit prices, I’m going to come in here and I’m going to put varying amounts over time. And I’m going to come into January, February and March, and I’m going to put the actual numbers that this business did in January, February and March. So in January, we sold 250 units of our product. In February, we sold 290 units. And in March, things started to go haywire and we only sold 120.
Forecasting for the rest of 2020
[00:21:59] And now I’ve got to forecast for the rest of the year, and I’ve got to make a guess, and don’t sweat the details right now because you can go back and change it. What you want right now is to understand what are the implications and what could happen. So March, the first couple of weeks were not so bad, and then I just got crushed. So I went from averages of 250, 290 units down to 120. And now in April, I’m kind of scared. I think I’m going to be lucky to get 50 units, and that’s what I’m going to put through July. And then I’m going to hope that things start to improve, and hopefully I can start to gain back some of my customers and get back up to something that’s more reasonable. And then in January of 2021, I’m going to hope that I’m back to where I was, and I’m going to put 280 and I’m going to use a little cheat here, these little dots here, and I am going to fill everything.
[00:23:01] So not I’ve got my units and I’m very clearly showing, for instance, if I’m going to get an EIDL loan or a PPP loan, you’ve got to show the implications of what’s happened to your business. So these are actual unit numbers. This actually happened. And now I’m going to have some justification why I think things are getting worse. And I think that justification these days is pretty easy.
[00:23:25] So now I’m going to go to unit prices and this is what I’m charging. What am I charging for my units? So I’m selling my product, it doesn’t matter what the product is, but we’re going to sell, say that I am selling my product for $120. So I’m just gonna put that in a constant price. I’m not gonna change my price right now. I might have to sell it for cheaper if the economy continues to do what it is. But for right now, I’m just going to see what this is. So I’m gonna put it in there and I’m going to save and close. And now in this revenue projection, I’ve got my revenue numbers right. And I’ve got my unit sales. So you can see 2020 compared to getting back to normal. Right, 2021 I put those unit sales where I get back to normal. 2021 is back to normal. This very clearly shows you where the coranavirus has really impacted my business. And again, that’s one of those things that’s going to be important for most loans that you get from any government entity that’s giving aid.
[00:24:31] Now I’m going to add an additional revenue stream and I’m gonna call it services, because not only do I sell a product, I sell some services as well. So I’m going to put some billable hours here. And again, I’m going to do varying amounts over time. In January and February and March, I was able to actually sell, and you know I would look it up, 245 billable hours. February was a shorter month, so we actually only did 220. And in March, things really just dropped off. And now I’ll be lucky, I think in April to get 30. And I’m just going to keep it at 30 until I start bringing it up again.
How forecasting works
[00:25:21] Now again how do I know this? How do I know what I am going to sell in the future? I don’t, I’m making educated guesses based on what has happened in my business and what is happening today in the world. So I don’t know for sure. I’m making these educated guesses and I’m going to just work on this forecast and quickly see where I am and what’s going on with the business. And can I get back up to what I’ve been doing?
[00:25:50] So assuming that I recover, there is back up to my over 200 hours and then I’m just gonna do a constant rate. I charge my customers $75 per hour, and so I’m just going to put that in there. And now I’ve built very quickly my sales and my service as an example. So you can see here, 2020, I’m taking a pretty big hit right? Here I am with barely a quarter-million dollars compared to what it should have been, close to $600,000 because 2021 is barely getting back to normal. And how do I know that? I’m looking at my past results when I’m doing all of this forecasting.
Adding direct costs
[00:26:36] So now that I’ve got my revenue in there, I’m going to jump quickly into my direct costs. You can do this in any other spreadsheet, but you’re gonna have to do your full financial forecast to see the implications on the actual cash that your business needs to survive. So I’m going to have a direct cost and I’m going to call it COGS for sales one, because I added sales one. And I’m going to actually put this in for a specific revenue stream, because this is what it costs me to buy the product that I sell and maybe I’m manufacturing the product. But I’m just going to say this is what it costs me to buy and build that product. So true sales one and I’m actually going to make the kobs a percent of the revenue stream. It’s easier for me to do that. It gives me a budget and it makes me focus on saying, OK, I cannot let my cost of goods for my product get up over the percentage and my product actually cost me 45% of the revenues. So I’m just gonna put it in there and I’m going to try to hold to that budget.
Cost of Goods Sold
[00:27:45] So now this forecasting is giving me some good expense budgets to stick to. So here I have COGS for sale. I don’t have COGS on my service. I just have them on my sales. So I’m going to jump back into my personnel and I’m going to add some personnel. I’m going to add myself as the owner. I’m regular labor. Direct labor would be anything that is part of your gross margin and your direct costs. So factory workers, anyone helping you manufacture your product, sales people that are on commission only or just the commission part. If you’re not sure about direct costs, type your industry and list of direct costs into Google and you’ll understand which ones of your expenses are direct costs. Make sure you do this correctly because you want to understand the gross margin for your business. Gross margin is sales and basically it’s the difference between sales and what it costs to sell. And that gives you a margin and that then allows you to see how you do in the industry compared to other people.
Labor and employees
[00:28:55] And it could give you a really, really big clue, right? If your gross margin, if you’re at that 45% percent and everybody else is at 30%, well, then you know that you’re buying pretty expensive things and maybe you have a higher-end product and that’s okay with you and you charge more for your product, but at least you have that information. Or maybe what it tells you is you have to negotiate with your vendors and you got to get a better price for your product. So important to understand. But we’re just going to have the owners as just direct labor and then how much is their salary? I’m just going to put an annual salary for the owner. Remember, put all my staff in right now and see if I can keep everybody onboard, because that’s going to allow me to see if I can apply for the PPP program. So I’m going to pay myself. I pay myself $65,000 a year. Hopefully I can afford to do that this year. I’m not sure, I’m not going to give myself a raise. And I am an on-staff employee, meaning there are payroll taxes, maybe health insurance.
[00:30:01] A contract worker doesn’t have any of that. That’s somebody that you contract with. And they pay their own taxes and they’re not an actual employee. So I’m going to save and close that. I’m going to show you here. This is where you attach that payroll burden for your on staff employees. We have 20% as a basic average. If you’re getting health insurance, maybe doing some retirement savings contributions, that’s a pretty good estimate. I’m going to say that I’m at 18% because I’m a smaller business. I don’t give great insurance. I just can’t afford to. A really fancy tech company might be at 35% burdened, just to give you a sense, and if you give absolutely no benefits at all, you might be at 9 or 10 percent. So just to give you a sense, I’m going to estimate this here.
[00:30:59] I’m going to add more personnel. I’m going to say staff and I’m just going to call them staff. And I’m actually going to say they vary in numbers because right now I’m not sure what’s going to happen, but I’m going to keep the staff that I have. So I’ve got 2 staff. And I’m just going to fill that all the way across because I can’t lay anybody off if I want to get this payroll protection so then I’m going to come here, they’re regular labor. And then how much am I going to pay? It’s annual and it’s going to be an average for the two people. So on average, I pay them $45,000 and I’ll go next as they are on-staff employees. So now I’ve got my head-count. I’ve already calculated automatically the employee-related expenses. That’s because of the burden rate, and I’m ready to go to my expenses. In a second here we’ll be able to jump into this cash flow and I’ll be able to show you.
Adding expenses
[00:32:07] So now I’m going to add my expenses. The first thing I’m going to do is I’m going to add rent. And that’s the constant amount, right? It doesn’t change. It is what it is. And I’m going to put my rent at $1,500 per month. I rent a very small office. There’s only three of us. That’s all it costs me. So I’m just gonna put that in. That’s there. I’m going to add another expense. I’m going to call it marketing. I have to do some marketing or I can’t sell it. People don’t know what I’m selling. I’m gonna be really out of luck. I’m going to market as a marketing expense because then I’ll be able to compare it to those benchmarks I mentioned. And then we do something that I’m going to encourage everybody to do. You want to every time you can, make an expense a percent of either overall revenue or specific revenue stream. Now, I can’t do that with rent right? Rent Is a fixed expense. It’s always the same amount no matter what. But marketing, I need a budget for marketing and I’m going to try to figure out what that budget is.
Budgeting for marketing expenses
[00:33:11] But if I do it as a percent of sales, then it’s not just a flat number, then it’s a number that changes depending on how my sales are. So I’m going to say it’s a percent of the specific revenue stream. Well, actually, I’m going to do it. Overall revenue, because I’m going to do a marketing budget for the whole company. And right now, I’m going to do what I’ve normally been doing. I’ve been spending 15% in marketing. That might not be possible this year given where I’m at. But right now, I’m just going to put that in and see where I’m at. So I’m going to save and close that. Now, I can put more expenses in here, but for the purposes of getting to cash flow I’m not going to put more expenses in here, but, you know, insurance, accounting, professional services, all of that can be put in here. So now I’ve done revenue, direct costs, personnel and expenses before I get to the rest of them.
Reviewing your P&L statement and making final adjustments
[00:34:08] I’m going to jump to the projected P&L and see where I am. No surprise, I am not making money in fiscal year 2020. I am $59,000 in the hole in terms of profit. This is not cash, this is profit. Now, 2021 and 2022, things are looking pretty good. In order to be a little bit more realistic, maybe I’ll put a couple more expenses in there so that we can see the implication of cash. I’m going to say professional services so that if you have any legal expenses and your bookkeeper or your accountant and that’s gonna be a constant amount. I budget $1,500 a month for that and I put that in there and then I’m going to do some insurance and you’d have business insurance. So I’m going to put that in. And that’s a constant amount, and that costs me $800 per month, actually, maybe $1,200. And I’m just going to put that in there and then I’m going to put some office supplies in there. This one, I’m going to do a percent of overall revenue. I’m never gonna want to spend a ton on office supplies. I really want to have a budget for my office supply. So I’m gonna say 2% of my revenues is spent on office supplies. So I’m going to put that in there. So I have a few more expenses here.
[00:35:40] Now I’m going to go back to my P&L and you can see I’m almost $100,000 in the hole here and I’m still profitable for the other years. For these years, maybe I can hire more people. But right now, this is what my business looks like. Now, I’m going to go back to my financial tables here and I’m going to talk a little bit about assets, taxes, dividends and cash flow and financing. One of the things that’s important is to make sure that wherever you’re doing this work, you’ve set a starting balance for your task. So we’re gonna do that right now, because when you started in January 2020, you had some money in the bank and maybe you had some accounts receivable customers that you were billing. Maybe you had some things going on. So when I started in January, I had $23,000 in the bank, so I’m going to put that in there, or maybe I’ll say I’ll have $13,000. And in accounts receivable, I had $4,000 in accounts receivable. I get paid every 30 days. I had $2,000 dollars of inventory. I don’t have any assets. We’re not going to worry about depreciation right now. That’s more complex than you probably need to do right now. It won’t really affect your cash as much. And I don’t have any debt or loan or anything, which would be the current. Anything else that I own? And then I don’t have any debt, so the liability side.
Accounts Payable and Liabilities
[00:37:10] So now we’re gonna go into liability and accounts payable. I owe $5,000 in all kinds of different vendor things. I don’t have any income taxes that are payable yet. And I’m in Oregon where there’s no sales tax, so I’m not going to worry about that. And I don’t have any prepaid revenue or anything else. So I’m just going to go on here. There’s no paid-in capital. There’s no investment money or anything. I’m just going to save and close this.
[00:37:37] So now I’ve got my starting balances. Really important for the cash flow. If you think about, how much cash do I need, you have to know how much cash you start with in order to see how it works. Now we’re going to go back into these financial tables and we filled all these things out. We’ve seen what our profit and loss is looking like. I’m going to go into assets. If you have assets, you would add them here, a truck, a big, large piece of equipment, if you own a building, this is where you would put it in. I’m not going to worry about it. My business doesn’t have assets, my products, my services, no assets to really deal with on the taxes. I’m going to set my tax rates and my estimated tax rate at 8%, and I don’t have any sales tax because of the state where I live in. In Oregon, we have no sales tax. So there we go. We’ve got our taxes dealt with. I’m not going to deal with dividends. That’s it, business is going really, really well, and you have a certain structure of your business. You can pull money out of the business for the owner. Business isn’t going well. I’m not going to worry about dividends.
Cash flow assumptions
[00:38:48] Now I’m going to get into my cash flow assumptions. This is the meat of it. Now, you can see I put together my entire financial forecast and I’ve done it pretty quickly. You don’t have to spend a ton of time here, but you do have to do it so you can see how all the levers work together. Now, I’m going to show you right now, you can see I start with my $13,000 of cash and then I add to it in January. But things are going pretty bad here, right? These are my actual cash balances in the bank. This means I’ve bounced checks. I am not alive anymore. I cannot as a business, have negative cash in the bank, right? No one lets us have that. It’s called a loan or a credit line or it’s called your bank run, right? So at the end of the year, my cash is in really, really, really bad shape. But that is assuming I don’t have any sales on credit, i.e. I do not invoice anyone. And that’s not so, I sell billable hours. Right, you saw those hours, I have the invoice for those hours. So I’m going to say that half of my sales are on credit.
[00:40:00] Now, you saw how that makes my cash change. Do you see that? I’m going to do it again. Now, I’m going to go up to saying maybe 70% of what I do is on credit. Now, do you see it’s way worse because that’s the reality, that’s what happens. And it takes 30 days for me to get paid. So I have to put that in there. Those are the calculations that can get complicated. Right now, all of my purchases are on credit. I use my credit card and I have 30 days to pay. So that helps a little tiny bit. I was up over a $100,000. I’m down, I’m at $87,000. Now I’ve got to put it in my inventory. I keep inventory on hand. I always have about three months of inventory and my minimum order size is 2,000. So now I’ve done that again and now I’m back up to above $126,000. So this gives you a sense, I cannot make it through 2020 on this current forecast if I don’t get a loan that covers me, at least in the nature of $126,000. Obviously I need a little bit more cushion than that, right? I can’t just get $126,000 because that’s really, really going to cut me tight. and if the cash is so bad this year that it actually cascades into next year.
[00:41:25] And so now I can show a three, six, twelve month cash flow projection. You can see what’s going to happen in three months. You can see what’s going to happen in six months. And you can see how that affects the rest of my business. So now I have an actual number of a loan that I need if I’m going to make this business work. Now I know whether the PPP is going to work for me or a different sort of loan structure. So now I go into the financing side and I’m going to click on the financing side. So it’s showing me my projected cash and I’m going to have to add a loan. What I’m going to do is add a loan, and right now I’m going to say I’m not sure what I’m going to get. So I’m just going to put a loan at 3.75%. Interest rates are really, really low right now and I’m just going to assume that I can get something at a decent rate. So I’m going to receive this in April and I am going to ask for $150,000 to give me a little bit of cushion. So I’m going to ask for that and I’m going to say that it is 3.75% and I’m going to hope that I can get a 10-year loan. So 120 months. So I’m going to save and close.
[00:42:52] All of a sudden my catch is doing pretty well. Now I’m negative here, so I would go back and fix that because presumably I got through February and I wasn’t negative. So I’m going to go back and I’m going to say, you know, in my balance sheet I know that I had a little bit more cash than I thought. Maybe my accounts receivable was big or something like that. So when you do that and change, because we’re going to assume I wasn’t negative in February, so I’m going to save and close that.
Reviewing your cash flow forecast
[00:43:27] And I’m going to go back to my cash flow forecast now. So here’s my cash flow, but now you can see in 2020 I actually end up with $15,000 in the bank. So I definitely need a lot of cash. But with that $150,000 loan, I can actually make this happen. I can look in here and I can actually see the monthly detail. This is the important piece. You need to be able to go in there and you need to be able to see, for instance, in March what is my cash now? It’s still showing that negative. We would fix that, obviously, cause that’s not so. But there you go. Net change in cash was $11,000 in the positive. Then I get my loan in April. So all of a sudden there is my loan, and that’s what’s going to be able to sustain me. And I’m able to go and I’m able to look. And every month here now, my cash is getting pretty low. But then my business starts picking up. And as my business starts picking up, I am in better shape. So you can see that and then I can go back to that yearly view.
[00:44:41] This is what you would need to supplement a loan so that you could get in front of that loan officer and show them that you understand what’s going on. Here’s your projected cash flow on the balance sheet. This is what tells you what you owe, right? You’re going to see on the balance sheet here that in 2020 we have this long term debt. That is that loan that you took out and you end 2020. You’ve paid a little bit of it off right? If you see the monthly details, I’ll show you the monthly details. Here’s your long term liabilities, so you get the loan, but you need the money. You start using it right away, and then you start paying it off little by little. And we automatically help you in our tool make sure to separate the principal and the interest and put it in again.
[00:45:33] Something else that’s really important. If you’re going to go do this in Excel, you’ve got to make sure that you understand how all of this actually works on your balance sheet, on your P&L, on your cash flow. So we’ll go back to the cash flow. I’m going to show you again and I’m going to show you in this detail that while our flows are negative, we’re losing more cash than we’re bringing in, that loan is our stop gap to allow us to do that. It allows us to get through barely, right? So we get through by the end of the year and we’ve got our projected cash flow and we, you know, end the year with $15,000 positive in cash. So if we can implement this plan and we can get that loan, we can sustain this business. Now, things might get worse. Things might get better. So you may have to keep coming back to it. You may have to keep coming back to your revenue and you may have to keep adjusting things where, you know, you thought that in March you were going to bring in $8,000. Now, it’s not the $20,000 you brought in, you know, in April, it’s $8,000 in March it’s $20,000. It’s not the $50,000 you’re used to bringing in, maybe you can’t, maybe you’re down to $4,000 and you’re going to have to come back in here and you’re going to have to adjust and adjust and adjust.
Creating multiple forecasts
[00:46:57] One of the other things you might want to do is actually create a couple what-if scenarios for your cash flow. That means you have a forecast. You’ve put it together and now maybe you want to have a pandemic scenario again. You could do that in Excel. Take what you have. Copy that sheet. Change the name. Start working with the numbers on it. You can do it here by creating a new forecast. You can copy an existing forecast and you can call it pandemic worse. And you can put it in here and now you can start playing with that. But the really important part to understand is that you can’t get a cash flow forecast without doing all the rest of the work. And profit is not cash, right? We end the year in 2020 positive cash, $15,000, but this is not a profitable year for us. This business is not profitable. But this business is viable. We can get by. We can plan to be unprofitable. We can plan to get that money in that loan and survive and make it to 2021, where all of a sudden we start making profits again and we’ve survived this crisis.
[00:48:15] So here we are very unprofitable and we do not see profits again until next year. But although we are unprofitable, we are cash flow positive in terms of having that cash in the bank. So there we go. We have that cash. Even now, the change in cash is negative. We have the money in the bank and we can make it through and we can show that we can make it through. So we can see that, and again, go back to that cash at the end of the period. And here we are were able to actually make it through and understand all the different drivers that drive our cash.
What else can you change?
[00:49:02] Now, another thing that you can do is think about, can I change my drivers? I can go back to my cash flow assumptions. If you have them in your spreadsheet, you’ll have to know how that all works. And I can say, you know what, I really don’t want to get a $150,000 loan. What can I do? How can I make this different? And you can say, you know what, I’m going to give a discount to people if they pay upfront. And so maybe I can bring that down to 50% and maybe I can really work on people getting me paid in 15 days instead of 30, or maybe it goes the other way. Maybe we’re going to have to give your customers a break. So you’re going to have to give them forty five days. And now you see we’re back and, you know, we may be in a little bit more trouble. So you can pay for all of it. Maybe you ask your vendors to give you 45 days to get paid and now you’re in good shape here.
[00:50:00] You can actually make this work or maybe you’re going to go up and you’re going to have more people who want to buy on credit and they’re not going to be able to pay you right away. So your percentage of sales on credit goes up. You need to play with these things. You need to understand them, and you need to be realistic about how this is going to impact your business. So that then you can start toggling back and forth and understanding how much money you’re going to need and what the implications are.
Which financing option is right for you?
[00:50:33] So, what is actually available out there? What can you actually get? What loans are available? There’s a lot of different options. Interest rates are really, really low right now. I put a loan in for 3.75%. It’s very possible you can get a loan for 2%. Maybe you can get it for less. Interest rates, at least in the US are very, very low. It used to be- not too long ago that 6-7 percent for a business loan, particularly a young new business, was a pretty good interest rate. So it all depends on, you know, what’s going on right now. Now, maybe you can get a 0% loan, right? The Payroll Protection Program, if you do it right, is a 0% loan that actually turns into a grant. So you can play with that. You can go into the financing piece and you can put in. And I’m just going to go back to my forecast here. But you can put in the financing piece instead of this loan and you can add a custom loan where maybe it’s a PPP loan and the interest rate is 0. And I’m not going to pay it back. And I can then put my $150,000 loan here. And I’m going to say I’m not going to pay back at all because it’s going to be fully forgivable.
[00:52:00] I can come over here to this loan and I can delete this loan because I’m not going to get this loan for 3.75%. I’m going to get my PPP loan and then I can see what that does because I have no payments on this loan. I don’t have to pay this loan back. This just becomes a non-taxable grant. So one of the things that is most important and I want you all to understand, I get a lot of questions and fear about forecasting is you just have to get in there and play with these numbers and finding a tool that allows you to play with numbers and allows you to experiment without any implications. You’re not in your accounting software. You’re not doing anything to your books. You don’t have to worry about that. Leave your accounting software alone. You’re in a tool that allows you to create a strategic forecast. It allows you to understand the implications of this current economic crisis due to coronavirus. What is it going to do to my business? Do I have to lay people off? Where can I cut down expenses? What happens with my revenue?
[00:53:12] Let’s go back to the revenue projections and look at that. Right. I should be making over $400,000 this year. It’s not going to happen, I’m less than 50% of my revenue, and that maybe is optimistic. So now I can create another scenario. But if you don’t do all of this cashflow forecasting and profit forecasting, you’re putting yourself at a disadvantage. And we are all in a stressful time and you’re just making decisions based on what is getting thrown at you, what the money is in the bank, and you’re not able to actually sit down and create a roadmap and understand your options. Now, with that, we’ve got six minutes left and I’m going to just kind of go through some of these questions and answer some.
Can you import financial information into LivePlan?
[00:54:07] Somebody asked if it was possible to import prior year financial reports to feel previous year debt data. It absolutely is. You can import them. In fact, I can show you. You can use QuickBooks data or Zero or anything else. It’s not just QuickBooks data, but you can use existing accounting information and you can import that. And for your previous your actual so you can actually do that. So that’s a really good question.
Can you use LivePlan to start a business?
[00:54:41] And there’s a little bit of questions we always get them in terms of starting businesses. You can absolutely use this tool to start a business. You can use any forecasting tool. There are some major opportunities right now. It can also be a really hard time. Right. But if you’re unemployed, if this is a chance for you to bring some products and services to the table, there’s a lot of really interesting things happening right now. And if you look back at the history of the world and then let’s say the history of the United States, because I know that better big, huge, major historical events have completely changed the way we operate socially and also from a business point of view. So you want to see major changes in American history. Look at World War One. Look at the Great Depression. Look at World War Two.
[00:55:42] And I can guarantee you that 20 years down the long road, we’re going to look back at it and we’re going to see how this crisis majorly changed the way we operate, both socially, as well as the way business works. And so there are some big opportunities. You just have to be able to think through them very quickly and very carefully.
Pivoting your business
[00:56:06] There’s also opportunities for businesses to pivot locally here in town. There is a distillery and they have changed their manufacturing and they have started manufacturing instead of the alcohol that they’re very well known for their whiskey distillery. They have started manufacturing sanitiser. It is a huge need. Everybody wants it. You can’t get it. And they’ve completely pivoted their business. Now, I’ve also read that alcohol consumption has gone way up since we’re all in quarantine, so maybe they should be doing both things. But it’s just an example of a way a business has pivoted and almost has become a start-up. So that’s, you know, something to consider.
1099 employees and the Paycheck Protection Loan
[00:56:54] Another question here is someone asking that employees who pay their own taxes do not count towards payroll staff. What the definition is, if you have 1099 employees, they are contractors. They do not count on your payroll. They are going to have to do their own application to the PPP. They do not count as your FTE. The only employees for the PPP program that count are FTE. They don’t have to be full-,time employees, but they have to be on staff employees that you pay payroll taxes for if you don’t pay payroll taxes for them, then they’re called independent contractors and they are 1099 employees. You cannot count them as part of your payroll.
[00:58:21] Some of these resources that we’ve talked about. So first of all, if you’re interested in LivePlan, first months, two months for ten bucks so you can come in. You can see the promo here. We’ll also put it in the chart. So if John or Kody could put that promo in the chart and we’ll send it to you in the follow up to this webinar so you will get this link and you will get that promo. The other thing that we always do with all our software is a 60 day money back guarantee. You use our software and you feel like it did not work for you. It did not do what you wanted. Then you can let us know and we will give you your money back. Obviously, that’s not about you trying to get in there, use everything for free and get your money back. We’re all trying to make a living right now and we’re all trying to survive this. But we really are cognizant that it’s a really hard time for people right now. And we’re trying to do our best. We’re trying to give you as much information as we can. We’re trying to give you as much help as we can.
Let us know how we can help
[00:59:25] And to that end, I welcome anyone to respond to the email that you get. Following up from this webinar with any feedback, any questions, any concerns, I’d love to hear from you what other topics you want us to cover. Is there something that you’re dying to know that you think we might have some expertise? Can we help you understand maybe get more into details of strategy in forecasting and how you do that? Maybe we can help you understand more about potential loan options. Maybe we can help in a specific industry. So all of that feedback is welcome. We want to hear from you. Just reply to the email and let us know what your thoughts are, what you want to hear from us, how this webinar was. And if you decide to go ahead and get our software, please remember to use this promotion. And now that we really stand behind our money back guarantee, we really mean it. We really, truly want to help people succeed in business. And we know that this is a really, really hard time for everybody.
What’s required for a Paycheck Protection or Economic Injury Disaster Loan?
[01:00:36] A couple more questions in terms of the applications for loans and what’s required right now. What you need to show for PPP and for the EIDL loans is just three and six months of forecast and cash flow. And really, we need to show us the impact of the coronavirus on your business and you need to document it. So a forecast that shows actuals for the beginning of this year. And then how March was affected and how you expect the rest of the year to be affected and how that affects your profit and your cash is probably all you need. And likely we’ll do that for you. And in fact, in LivePlan, you can print things out. So I can go in here and I can actually download and print all of my forecasts. So something that you can do. So it is about documenting what’s happening to your business and what’s going to happen to your business. There’s more resources here. The U.S. has SBDC small business development centers through the SBA. They are all over the country. They are here for you. They can help you. They’re gonna help you figure out these loans for free.
[01:01:54] Now, the biggest caveat that I will throw out there is everybody’s swamped. So you’re just gonna have to understand that everybody’s in the same trouble and everybody is trying to do their best. I included Oregon SBDC. That’s where we are. We always like to give a shout out to the Oregon SBDC. They have some really good information on their website. There’s a lot of information here about applying for SBA loans, business resources. We’ve put together a whole COVID-19 Resources section. There’s other webinars, there’s other articles and information. And down at the bottom here, there’s a cash flow statement example completely for free that you can download in Excel if you’re curious. So all of that is there. We will include the resources for you when we send that follow up webinar. And with that, it looks like I’ve probably done most of the questions here. There is a good one that I haven’t addressed the nonprofits.
Are non-profits treated differently with the Paycheck Protection Loan?
[01:03:03] There is somebody asking if non-profits have a personal guarantee for the loan. So the nonprofits are eligible for the PPP with no personal guarantee at all, just like everybody else on the emergency injury disaster loans. All of us have a personal guarantee. I am not sure that the EIDL is even eligible for nonprofits, so that’s a really good question and we’ll follow up and find out. That may not be because of that personal guarantee. So I really appreciate all of the questions. I really appreciate everybody joining us. And like I said, we want to hear from you. We know it’s a really difficult time and we are scrambling and doing our best to get you as much information as possible. So the more that we know it’s useful, the more that we know you want, the better job we can do.
[01:04:01] So with that, I’ll sign off. I thank Kody and John for helping me out and thank everybody for attending. And look for that email and try to get that out to you. This afternoon, we know it’s Friday and we know people are pretty stressed out about everything. And we’re gonna do our best to help you. So thank you very much, everybody.
Sabrina has served as CEO of Palo Alto Software since 2007.
